Abstract
This paper presents a New Keynesian model to capture the linkages between macro fundamentals and the nominal yield curve. The model explains bond yields with a low level of news in expected inflation and plausible term premia. This implies that the slope of the yield curve predicts future bond yields, and that risk-adjusted historical bond yields satisfy the expectations hypothesis. The model also explains the spanning puzzle, matches key moments for real bond yields, captures the evolution of the price-dividend ratio, and implies that the slope of the yield curve and the price-dividend ratio forecast excess equity returns.
| Original language | English |
|---|---|
| Journal | Journal of Financial and Quantitative Analysis |
| Volume | 60 |
| Issue | 7 |
| Pages (from-to) | 3551-3590 |
| Number of pages | 38 |
| ISSN | 0022-1090 |
| DOIs | |
| Publication status | Published - Nov 2025 |
Keywords
- Inflation variance ratios
- Robust structural estimation
- Term premia
- The expectations hypothesis
- Unspanned macro variation